The Biases Influencing an Investor's Behavior in India
54 Pages Posted: 2 Jul 2016
Date Written: May 26, 2016
This study aims to investigate the impact of behavioral biases on the investor’s financial decision making with special focus on three biases, namely confirmation bias, loss aversion and endowment bias. Investors are always assumed to be rational thinkers as per the traditional economic theories but the volatile market behavior has challenged the efficient market hypothesis. Behavioral finance is a newly developed approach in response to the difficulties faced by the traditional investors. Investment markets are becoming increasingly risky making the investors behave differently upon different market dynamic forces. Recent researches on individual investor’s behavior have shown that people do not act rationally while making decisions, rather several factors influence their decisions whether it is related to stock market or personal financial investments. It is necessary to understand the major cause of irrationality in the markets. Empirical data has been collected through administrating a questionnaire and this data is used to investigate whether investors’ decision making is affected by the three biases. The study with the help of graphical representation of the data and proportionality Chi square analysis (goodness of fit) using SPSS software concludes that the biases have a direct impact on the decisions taken by the investors. This paper attempts to have an insight about the key factors influencing the behavior of the investors with respect to the demographics in relation to the investments and their personal financial decision making process. The findings of this study will be useful for investors to understand the common behaviors, identify their reactions while taking decisions for better returns and take corrective measures to not fall into the trap of the behavioral bias. It is also helpful for the financial planners to device suitable asset allocation strategies for their clients.
Keywords: Behaviour, Biases, Finance, Rational thinker, loss aversion, endowment bias, confirmation bias
JEL Classification: B26, C38, G02, G11, G14
Suggested Citation: Suggested Citation